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Wednesday, July 4, 2012

Brazil Interest Rates To Continue Falling

According to this Bloomberg report, Brazil expects to continue cutting the interest rate by 50 basis point intervals for the time being. The Selic rate is already at a historical low of 8.5% after five rate cuts. Yes, you read that correctly.

From the chart below, the interest rate has averaged 16% since 1999. An incredibly high level when you consider the rates in the US or Germany. Heck, the 10 yr Treasury in Italy and Spain doesn't even match 8.5%.

The amazing part is that the Bovespa trades closer to 3 year lows than highs. Shouldn't the significantly lower rates spur growth and investment demand? Well that use to be the theory but investors appear less forward looking than in the past.

Just as the higher rates in 2011 hurt growth these rates should fuel growth. Unfortunately any gains are likely to lead to a spike in the markets followed by sharply higher interest rates. The drastic cuts by the government are going to lead to volatile times.

The next meeting takes place on July 11th and the expected cut to 8% won't do anything for the economy in the short term. Ironically though, the original cut should really start kicking in just now. This upcoming rate cut will just fuel the fire of growth probably to an unacceptable torrid pace.

Investors should be looking at beaten down Brazilian stocks for entry points. Though definitely make a note to unload them after 3 or 4 rate hikes in 2013.

Disclosure: Long GFA and NIHD. Please review the disclaimer page for more details.